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Healthcare & Pharmaceuticals

Below you’ll find a curation of the top read articles of our award-winning journalism from 2017 amongst your peers in Healthcare
& Pharmaceuticals. This selection showcases a range of topical news articles, exclusives, popular features
as well as premium commentary and analysis.

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When Cary Parton pulled a back muscle playing golf four years ago, he hardly gave it a second thought. But after several
fruitless trips to a chiropractor, a series of X-rays led to a grim discovery: Mr Parton was suffering from
advanced lung cancer that had spread to his bones and organs. The tumour in his liver was the size of a fist.

He was given two rounds of chemotherapy, neither of them successful, at which point doctors told his wife he might be dead
in six months. He was 59.

“The big goal was to see my 60th birthday,” he recalls.

Then, in June 2013, Mr Parton enrolled in a trial at the nearby University of California, Los Angeles, where he received
a new type of drug made by Merck & Co, the US pharmaceuticals group. The medicine, Keytruda, was a checkpoint
inhibitor — a type of immunotherapy that removes brakes in the immune system to unleash the body as a weapon
against cancer.

The drug saved his life. Before starting the treatment, Mr Parton had been virtually crippled by bone tumours that were pressing
on his spine, causing multiple fractures. But by the time he celebrated his 60th in October 2013, he “felt
pretty good”. The following January he returned to work. Today his weekly exercise regime consists of three
trips to the gym, several three-mile walks and a round of golf on Sunday. His tumours have shrunk by 95 per
cent.

Trial is no tonic for BMS

1. Aug 5 BMS reveals trial of Opdivo had failed against chemotherapy in head to head trial

Since the first checkpoint inhibitors went on sale in late 2014, they have produced some remarkable results, helping even
the sickest patients survive for months or years longer than might have been expected. Mr Parton is one of
the lucky ones — despite all the enthusiasm, the drugs only benefit 20-30 per cent of cancer sufferers. “Immunotherapy
is not a silver bullet,” says Bob Hugin, chairman of Celgene, the biotech company. “Checkpoint inhibitors
only work in a minority of patients.”

Early hopes that pharmaceutical companies would be able quickly to raise response rates by combining the drugs with other
medicines have not yet been borne out by large scientific studies. Now the leading makers of immunotherapies
are racing to find a way of extending their benefits to a larger group of patients, while justifying the
lofty valuations bestowed on them.

Pathways to progress

Recent events at Bristol-Myers Squibb, which helped pioneer checkpoint inhibitors, suggest progress will not be smooth. In
August, the company dropped a bombshell when it revealed its checkpoint inhibitor, Opdivo, had flunked a
large clinical trial, which concluded the medicine was less effective for untreated or “first-line” lung
cancer patients than chemotherapy.

Patients taking Opdivo survived on average for four months before their tumours started to grow or spread, whereas those
on chemotherapy — the poisonous cocktail of drugs that has been a mainstay of cancer treatment for decades
— went for six months before their disease progressed. After sailing through every previous trial, most investors
had expected Opdivo to succeed in the study. Mark Schoenebaum, a veteran pharmaceuticals analyst at Evercore
ISI, the investment bank, described the failure as “the biggest clinical surprise of my career”.

Bristol-Myers insisted it could recover by developing a combination medicine that paired Opdivo with Yervoy, an older, complementary
therapy that releases a different brake in the immune system. The company told investors it might be able
to seek rapid regulatory approval to use the combination in first-line lung cancer patients at some point
this year, having been encouraged by the results of earlier scientific studies.

But last month the company upset investors again when it said it had “decided not to pursue an accelerated regulatory pathway”
for the combination therapy following a review of clinical trial data. Its reluctance to share further details
with analysts has left investors speculating as to what prompted such a swift change of heart.

In a statement this week to the Financial Times, Giovanni Caforio, Bristol-Myers’ chief executive, said: “While acknowledging
the competitive landscape continues to evolve, we believe the combination of Opdivo and Yervoy has the potential
to play an important role in first-line lung cancer [treatment].”

Investors have been unnerved too by the actions of AstraZeneca, which is studying a combination of two immunotherapies that
is very similar to the one being investigated by Bristol-Myers. Last month, the Anglo-Swedish drugmaker pushed
back the completion date for its large lung cancer trial and altered the design. Some interpreted the move
as a sign the company was losing faith in the virtues of twinning the two medicines. Shares in Bristol-Myers
have fallen by as much as 30 per cent since August, while its market capitalisation has dropped by more than
$35bn to $87bn over the same period

The industry’s choice

The company’s travails reflect the unpredictability of drug development and the giddy excitement that can take hold on Wall
Street in the early stages of a medical breakthrough. Some analysts were predicting that Bristol-Myers would
generate up to $12bn of revenues from Opdivo by the end of the decade, as oncologists chose its immunotherapies
rather than chemotherapy to treat the majority of lung cancer patients. They proffered such estimates even
though there had been no large clinical trials showing the drug was better than existing treatments for most
patients.

Since launching Opdivo in December 2014, Bristol-Myers has built a blockbuster drugs franchise, generating nearly $3.8bn
in sales last year. It secured regulatory approval to treat melanoma, before winning permission to use the
medicine on a range of other cancers including Hodgkin lymphoma and those in the kidney, and head and neck.

But the main driver of revenues has been the rapid uptake among oncologists treating “second-line” lung cancer that has already
been treated with chemotherapy, but which is no longer responding to the treatment.

The biggest prize is yet to come: the chance to usurp chemotherapy as the drug of choice for untreated first-line lung cancer
patients, described by analysts at Leerink, an investment bank, as the “single largest market opportunity
in oncology”. The American Cancer Society says about 222,500 people will be diagnosed with lung cancer in
the US this year, while about 156,000 will die from it. Only breast and prostate cancer are more common,
although they kill far fewer people.

Bristol-Myers’ hopes of dominating the first-line lung cancer market started to fade with the failure of the trial in August,
and have dimmed further still since it dashed expectations for a quick approval of its combination therapy.
Now some investors say they detect hubris in the company’s strategy.

When the lung cancer trial failed, the company’s subsequent conviction in the effectiveness of combining Opdivo with Yervoy
gave false hope, say investors.

“Shareholders are angry — a ton of people loaded up on the shares [after the first trial failed],” says Brad Loncar, founder
of the Loncar Cancer Immunotherapy exchange-traded fund, which holds shares in Bristol-Myers. “But in hindsight,
they exuded too much confidence about having a plan to get out of the hole in a semi-near timeframe.”

Another investor says the company has been “ideologically dogmatic” about the benefits of combining two immunotherapy drugs.

Analysts suggest the fall in Bristol-Myers’ value has turned it into a takeover target, most likely for Pfizer or Novartis.
“Why doesn’t Pfizer just buy Bristol-Myers today, given its floundering share price,” asked Timothy Anderson,
an analyst at Bernstein, in a recent note to investors, adding that he expected the drugmaker to bide its
time.

Investment bankers have started to chatter about such a takeover, according to one senior banker, who says Wall Street is
salivating at the huge fees that would be earned by working on a transaction that has the potential to be
the biggest pharma deal of all time.

Analysts say the biggest beneficiary will be Merck. “It is pretty amazing that the company that drove all the innovation
is slowly becoming second fiddle,” says one large life sciences investor who holds shares in both companies.

Whereas Bristol-Myers tested its drug in a broad group of lung cancer sufferers, Merck limited its trials to smaller subsets
of patients that it thought would be most likely to respond. In doing so, Merck limited the size of its commercial
opportunity, but also reduced the chance of flunking a large clinical study.

As a consequence, Merck’s Keytruda has been approved to treat a group of first-line lung cancer patients who have tumours
that contain high amounts of a protein known as PD-L1, which is thought to make them good candidates for
checkpoint inhibitors. Merck could expand further into the first-line market if the US Food and Drug Administration
approves the use of Keytruda in combination with chemotherapy. The surprise submission in January was based
on a study of 123 patients, which showed that the drugs shrank tumours in 55 per cent of patients versus
29 per cent for chemotherapy alone.

Seeking approval

The FDA often gives the nod to drugs based on limited data, especially when the patients who might benefit are very unwell.
Analysts at Leerink believe an approval could help Keytruda generate $3.8bn of sales this year, more than
doubling its 2016 revenues, allowing Merck to narrow Bristol-Myers’ lead.

Roche, the Swiss pharmaceuticals group, is also trialling its checkpoint inhibitor, Tecentriq, in combination with various
types of chemotherapy in more than 2,400 patients and expects to publish data that might lead to an approval
in the second half of this year.

However, it is unlikely that a single combination will provide a one-size-fits-all solution, according to Roger Perlmutter,
Merck’s top scientist. “What we are going to see is that different combinations will be more advantageous
for different patients,” he says. “This is personalised medicine.”

Dr Perlmutter says that, in an 80-year-old patient who was already suffering from other illnesses, “the idea of giving them
a very aggressive chemotherapy regime in combination with Keytruda doesn’t make a lot of sense”, because
of the side effects. “Whereas in a patient who is an otherwise vigorous 45-year-old stricken with malignancy
who has no other medical problems, you’re going to be a lot more aggressive.”

To that end, drug companies are running more than 800 clinical trials of combination drugs that include an immunotherapy,
according to the Cancer Research Institute, testing the medicines alongside older treatments like radiotherapy
as well as newer experimental compounds. It is impossible to predict which will work best, as evidenced by
Bristol-Myers’ travails.

Dr Perlmutter recounts a story from October, when senior scientists from Merck and Bristol-Myers ended up dining a few tables
away from each other at a restaurant in Copenhagen, where they were attending a medical meeting. Merck’s
scientists had just unveiled their successful trial, whereas Bristol-Myers had just published the full details
of its failed Opdivo study.

“I went over to see them, and they were so pleased, so congratulatory,” he recalls. “I hope that when the shoe is on the
other foot — as inevitably it will be — that I will be as gracious as they were.”

Battling lung cancer: how immunotherapy helps tackle the illness

First-line This term covers the first treatment most commonly given for a disease. With advanced
lung cancer it tends to be chemotherapy.

Second-line This treatment is given when first-line therapy either does not work or stops working.
In the case of advanced lung cancer this is usually an immunotherapy.

Types of lung cancer:

Non-small cell lung cancer About 85 per cent of cases are NSCLC. It typically grows and spreads
more slowly than small cell lung cancer.

Small cell lung cancer This makes up 15 per cent of cases. The tumours have cells that are smaller
than in most other forms of cancer.

Stages of NSCLC:

Stage 0 Only a few layers of cancer cells are discovered in a local area. Treatment consists of
surgery to remove the cells. The percentage of patients still alive after five years is 60-80 per cent.

Stage I Cancer is discovered in the lung tissues but has not spread to the lymph nodes. Treatment
typically includes removing part or all of the lung, and sometimes chemotherapy or radiotherapy. Five-year
survival rate: 60-80 per cent.

Stage II Tumours are larger and have begun to spread to lymph nodes but not to distant organs. Treatment
includes surgery, chemotherapy and radiotherapy. Five year survival rate: 20-30 per cent

Stage III Tumours are larger still and may be impossible to remove with surgery, in which case treatment
includes chemotherapy and radiation. Five-year survival rate: 10-23 per cent.

Stage IV About 40 per cent of patients are diagnosed at this stage. It is the most advanced form
of the disease, in which the cancer has spread to other areas of the body. Surgery is not usually recommended.
Chemotherapy is the first-line treatment for patients, followed by a checkpoint inhibitor. Five-year survival
rate: less than 10 per cent.

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After Maggie Philyaw developed Type 2 diabetes, she found solace not in the medicines of the pharmaceutical industry, but
the technology of Silicon Valley. Two years ago, her then employer in North Carolina signed Ms Philyaw up
to a programme run by Livongo Health, a California-based start-up, which gave her a device, smaller than
an iPhone and fitted with a cellular chip, that keeps track of her blood sugar levels.

Using the latest advances in cloud computing, the drop of blood she draws each day is instantly analysed, and a text telling
her what to do — “drink two glasses of water and walk for 15 minutes” — is sent if her readings place her
in the danger zone. At the press of a button she can also access further help over the telephone from her
“coach”, a highly qualified dietitian who has managed her own diabetes for more than 40 years.

For the titans of big pharma, Ms Philyaw represents omen and opportunity, as a disruptive breed of digital innovator becomes
the access point to healthcare for hundreds of thousands of patients and threatens to undermine the industry’s
decades-old business model. Big pharma has long focused on the lucrative business of drug development, supported
by armies of sales people deployed to persuade physicians to choose its medicines.

But emerging digital technologies are reshaping the landscape. A new generation of companies is using big data, sensors and
artificial intelligence to provide precise real-time monitoring of patients, especially those suffering from
conditions such as diabetes and chronic obstructive pulmonary disease, which are imposing a daunting burden
on overstretched health budgets.

As a result of the products and services these companies are developing, a patient’s primary point of contact with the health
system can sometimes now be a remote monitoring centre, or disembodied voice on the telephone, instead of
a doctor’s office.

“Rather than buying a pill, [insurers or employers] might buy an overall solution for diabetes,” says Tom Main, a partner
in 7wire Ventures, a venture capital fund that led the first round of investment in Livongo. “And that’s
a very different framework for pharma.”

Now retired from her job as a registered nurse, Ms Philyaw pays $50 a month for Livongo’s service and lives free of medication.
She counts her coach Toby Smithson, whom she has never met but who has offered practical and psychological
support, as her most frequent point of contact with the health system.

“I have a good relationship with my physician but I feel I speak with [Ms Smithson] more often,” she says. “Having a coach
has contributed to fewer doctor visits and less money spent that way. I feel that she really cares if I make
it or meet my goals [on diet and exercise]”, she adds.

***

Glen Tullman, chief executive of Livongo, says as recently as three years ago the technology underpinning his company did
not exist. But corporate America, which is a major provider of health insurance, is taking notice. More than
half the companies in the Fortune 100 are working with Livongo and it is eyeing expansion into Europe, Asia
and Canada.

Investors are starting to bet heavily on the potential of technological innovation to transform the way healthcare is delivered.
According to Rock Health, a venture fund dedicated to digital health, a total of $4.2bn was invested in the
sector last year, with companies in the analytics and big data category attracting $341m over 22 deals, more
than doubled from 2015.

However the pharma industry will have to grapple with its own entrenched culture if it is to take advantage of the expansion
in digital technologies.

Stefan Biesdorf, who leads McKinsey’s digital pharma and medical technology work in Europe, says the margins achieved by
a digital health business are small compared with those associated with a blockbuster drug, making it harder
to build a commercial case for investment. Moreover, the never-ending cycle of tweaks and upgrades through
which a digital device passes is foreign to an industry that will wait more than a decade to get a drug from
bench to bedside — but expects to make no further changes once it has secured regulatory approval.

Nor is the industry well placed to exploit a new healthcare universe that requires an ability to build lasting bonds with
consumers. He cites as an example mySugr, a Vienna-based company that uses a similar blend of technology,
combined with on-demand support, to collect data directly from consumers.

“It only has 50 employees but it has much, much, more in-depth understanding of patient behaviour in diabetes than probably
some of the largest diabetes companies, or insulin producers, in the world,” says Mr Biesdorf.

Joe Jimenez, chief executive of Novartis, the Swiss drugmaker that is widely seen as the leader among big pharma companies
on digital health, concedes that the industry has been “slow to adopt some of the digital technologies, compared
to other industries” and recognises “a risk that some of these digital start-ups ‘own’ the relationship with
the physician and the patient and they distance the pharmaceutical company from that”.

However, Mr Jimenez, a former Heinz executive whose background is in the fast moving world of retail, says the industry is
adopting digital technologies “at an accelerated rate”, and argues that they can boast a base of knowledge
the digital minnows cannot rival.

“I do believe that large pharma companies have an advantage, not on the agility side but definitely on what they know about
disease states, about patients, about the entire healthcare system, and many of the start-ups don’t have
that experience,” he says.

Mr Jimenez adds that the digital exemplars are “definitely either potential competitors or they will become partners”.

A flurry of deals in recent years shows that some pharma groups are racing to boost digital capability, by buying companies
that offer ready-made expertise, or entering into partnerships as they seek to offer services “beyond the
pill”.

Teva Pharmaceuticals showed the way in 2015 when it announced it was buying Gecko Health Innovations for an undisclosed sum.
The lure was Gecko’s main product, CareTRx, a platform to help chronic sufferers from respiratory disease,
which combines a sensor device that connects to most inhalers with a data analytics function.

Meanwhile, the French drugmaker Sanofi recently joined forces with Verily Life Sciences to work on devices and patient support
for diabetics, and Pfizer is working with IBM Watson as part of its work on immuno-oncology, using its expertise
in data analytics to identify new drug targets.

Erik Nordkamp, the UK head of Pfizer, says the future of healthcare will involve “a convergence of technologies to come to
better solutions”.

“Both locally and globally we are . . . having discussions with some of these companies to say, ‘what could that future look
like?’,” he says.

***

It is still early days for big pharma’s digital push. Even Novartis, which says it investment in cutting-edge technology
is informing everything it does, has yet to bring any digitally enabled products to the mass market.

One promising programme centres on its heart disease drug Entresto, which has been found to reduce hospitalisation and cardiovascular
death by 20 per cent. It has formed a joint venture with Sanitas, a Swiss health insurer, to offer remote
monitoring and coaching for patients with advanced heart failure.

Yet progress is slow. A pilot project features only 50 patients and will be extended only gradually in the coming months.
Livongo, by comparison, has 35,000 “members”, as it terms its users.

Mr Jimenez points to other Novartis initiatives such as the Breezhaler, a wireless enabled asthma inhaler, and a “smart”
contact lens that can detect blood glucose levels through tears, obviating the need to draw blood, which
will be “much less labour-intensive and much easier to roll out very quickly”.

However, last year trials of the diabetic lens were postponed with no firm replacement date and Novartis is widely thought
to be considering the sale of Alcon, its eyecare unit. (The company says it is “reviewing strategic options
for the Alcon division to maximise shareholder value”.)

The imperative to develop a capability in this field is becoming stronger as health systems demand hard evidence that a drug
is effective and will ease strain on the budget — for example by reducing hospital stays.

Mr Jimenez says the prospect of these new payment structures makes big pharma “quite nervous. They say, ‘if I’m going to
be paid on the outcome of a patient’s health, then I want to be able to control patient adherence, for example,
because if that patient doesn’t take their medicine, then that means I won’t get paid’.”

He estimates that about 25 per cent of all health spending, including on pharmaceuticals, “is not contributing towards a
positive patient outcome”.

Lars Fruergaard Jorgensen, chief executive of Novo Nordisk, the world’s biggest insulin maker, suggests this is the missing
piece for all drugmakers.

“We have spent more than 90 years refining the molecules, yet we have less than 10 per cent of our patients in a level of
control that would eliminate the risk of late-stage complications and that’s not good enough.”

It has teamed up with Glooko, a Silicon Valley company that helps patients manage diabetes, to develop an app that will allow
sufferers continuously to monitor their blood glucose levels. Through another partnership, with IBM Watson,
it will gather data about the impact of its insulin, and patient compliance, that will provide “an increased
comfort level” that it can balance the risks and rewards in future outcomes-based contracts.

Patients who have better knowledge about their health will “also treat [themselves] better, which would lead to higher use
of high quality insulin from Novo Nordisk”, he adds.

One of the biggest problems for the industry, however, is whether an app produced by a pharmaceutical company — and related
to a single branded medicine — would generate the same degree of loyalty from patients and their doctors
as those produced by an independent start-up.

In North Carolina, Ms Philyaw expresses just such reservations. “Personally I probably would prefer a more neutral ground
that wasn’t connected to a drug,” she says.

At Livongo, Mr Tullman is planning to extend its service to cover at least two more conditions by the end of the year.

In a comparison that may resonate in the boardrooms of pharma companies, as they frame their response to the digital revolution,
he likens the impact of these health technologies to that of Uber, which created a whole new market.

“Everybody said it’s going to take the place of the traditional taxi but actually in the US people are using Uber who would
have never used a taxi before.”

He adds: “All of a sudden we can keep people healthier.”

Data ownership: Pharma chiefs formulate response to tech rivals

While some pharmaceutical industry executives remain uncertain how to respond to the digital health revolution, the danger
that tech groups may steal a march by collecting valuable data on their patients serves as a powerful spur
to action.

Andrew Baum, head of global healthcare at Citigroup, says the industry is well aware that companies such as Google, Baiduand
Yahooare investing heavily in artificial intelligence and machine learning to gain insights into patient
behaviour and responses to disease.

“The industry is not quite sure how to engage, because [digital health] is not really their core competence. But on the other
hand, they don’t want someone else to control the data,” he says.

Stefan Biesdorf, a, principal at McKinsey, adds: “In digital health the winners are going to be the companies that sit on
the largest amount of patient-level, granular data . . . a lot of players are taking and building a position
in the market.” IBM, for example, has recently acquired, for several billion dollars, four companies — Truven,
Explorys, Mergeand Phytel— that between them own large amounts of health data.

Some pharma companies are partnering with the major tech groups. Novartisis working with Google Healthon a smart contact
lens.

“The data are key to assessing the patient’s compliance [and] adherence,” says Joe Jimenez, the Swiss drug company’s chief
executive. “Whoever owns that data, or has access to that data, is going to have the power in the system.”

However, the data that exist in a real-world setting, or in health medical records, are stirring “sensitive” issues about
who has ultimate ownership, he says. “Is it the patients, or if the patient waives their right, can a company
own the data itself?”

Paul Polman thought it was just going to be an informal catch-up. But it quickly became clear that Alexandre Behring, chairman
of Kraft Heinz, had something very specific on his mind when he visited Unilever’s art deco headquarters
in London last month.

Had Mr Polman, chief executive of Unilever since 2009, ever considered a collaboration with Kraft Heinz, Mr Behring wanted
to know. Mr Polman took this as a sign of interest in Unilever’s spreads unit, home to brands such as Flora
margarine, which his company considered “non-core”.

When he pressed Mr Behring for more details, the Brazilian businessman offered to return soon with a more thorough presentation.
It was clear now to Mr Polman that this was no ordinary visit. He quickly assembled a small group, led by
chief financial officer Graeme Pitkethly, to try to predict what the Kraft Heinz executives might be thinking.

The team began to consider what it viewed as the worst-case scenario: a takeover bid. Even though its US rival was far smaller
than Unilever — a multinational corporation with annual sales of €52.7bn and 168,000 employees — Kraft Heinz
could still afford a debt-fuelled acquisition of the Anglo-Dutch company.

The proposition was one to be taken seriously, given that 50 per cent of Kraft Heinz was owned by two formidable dealmakers,
Warren Buffett and 3G Capital, the secretive private equity group that has been upending consumer industries
from beer to fast food.

Mr Behring, a partner at 3G, returned to Unilever’s headquarters on February 10. Over sandwiches, Mr Behring laid out his
audacious plan: Kraft Heinz would acquire its rival for $143bn, the second-largest takeover in history.

The cash-and-stock offer, which had the full backing of Mr Buffett and 3G’s founder Jorge Paulo Lemann, would create a global
consumer powerhouse. Yet the proposal, to say nothing of the $50-a-share bid, which Mr Polman thought grossly
undervalued his company, was appalling to the Dutch chief executive.

“The idea of being acquired appeared to blow his mind,” one person said about Mr Polman’s reaction to the offer.

Paul Polman: 'The idea of being acquired appeared to blow his mind' says one person about the Unilever CEO's
reaction to the sale

Another insider said: “When they put something on the table, Paul was just utterly categorical that there was
no merit. He gave a number of reasons why there was no interest in such an offer.” The offer was rejected
immediately.

Mr Behring was surprised by Mr Polman’s unequivocal response. He thought their first meeting had gone well. This misreading
would be the first in a series of mistakes that resulted in the bid’s collapse only nine days later.

When Kraft Heinz unexpectedly withdrew its bid on Sunday, it handed the first public defeat to a group of globetrotting investors
who are not used to seeing their ambitions thwarted. The Financial Times interviewed more than a dozen people
involved in the takeover battle to reveal how Unilever was able to beat back their offer.

A deal would have created the world’s second-largest consumer company by sales behind Nestlé. For the maker of Kraft Mac
& Cheese and Heinz Tomato Ketchup, it would have more than tripled last year’s annual sales of $26.5bn
and given the predominantly US-based group a deeper reach into emerging markets where Unilever dominates.

Polar opposites

From Mr Behring’s point of view, the timing was ideal. The 17 per cent slump in sterling since the UK voted
to leave the EU in June meant he could buy some of the world’s most recognisable brands — from Dove soap
to Ben & Jerry’s ice cream — in a once-in-a-lifetime sale.

For the Brazilian billionaires behind 3G, a Unilever acquisition would cap nearly 25 years of ever larger deals, including
investments in beverages group Anheuser-Busch InBev and Restaurant Brands International, the owner of Burger
King and Tim Hortons.

“The deal made perfect financial and strategic sense for them, but absolutely none for us,” says one person close to Unilever.

Kraft Heinz had misread Mr Polman, who likes to talk about managing growth for the longer term. By investing in its brands
and promoting initiatives such as environmental sustainability, Mr Polman has sacrificed short-term profits
for longevity.

In contrast, 3G has rapidly transformed the consumer industry by slashing costs, cutting jobs and raising profit margins.
In a sector buffeted by slower growth and changing consumer habits, investors have cheered its austere management
discipline, including a strategy known as zero-based budgeting. Rivals have recoiled at what they view as
a model that ultimately destroys businesses by starving them of investment.

Yet some investors have questioned whether 3G’s tactics are too mercenary. Mr Buffett, who has built up a grandfatherly image
as a hands-off acquirer and advocate of well-run companies, has faced criticism even from his own shareholders
about 3G’s more ruthless approach to dealmaking.

“I tip my hat to what the 3G people have done,” he said in response to a question at Berkshire Hathaway’s 2015 annual meeting.
He added that there were “considerably more people in the job than needed” at companies that 3G had bought.
A combined 13,000 workers have been cut since Mr Buffett and 3G purchased HJ Heinz and merged it with Kraft
Foods in 2015.

Still, 3G’s critics in the industry have been forced to respond to its aggressive management style — including Mr Polman,
who last year outlined a three-year plan to boost profit margins and growth.

But 3G should have realised that Mr Polman would never fully embrace its philosophy. That would mean that Kraft Heinz may
end up having to go hostile if it wanted to buy Unilever — a tactic Mr Buffett has vowed publicly that he
would never use in his deals.

Kraft also miscalculated on another front: the changes sweeping the UK following the Brexit vote. Theresa May’s conservative
government has become hypersensitive to the notion that British companies can be bought for knockdown prices
due to the economic repercussions of the referendum.

A deal that could have also come with ruthless job cuts would encounter further political resistance — giving
Mr Polman and his team another tool in their defence.

'Get them off the pitch early'

Mr Behring left Unilever’s offices with Mr Polman promising to get a full response from his company’s board after their next
meeting, set to be held later this month. Mr Polman immediately called and hired Nick Reid and Robert Pruzan
of Centerview Partners as his financial advisers.

Unilever’s team eventually grew to include Henry Stewart and Mark Rawlinson at Morgan Stanley, UBS, Deutsche Bank, law firm
Linklaters and Tulchan Communications for public relations.

As the group studied the Kraft Heinz bid more closely it came to understand what the US company was attempting to pull off.
The cost savings from combining with Unilever’s packaged foods business alone were enough to justify a
big premium for the whole company, even though the unit was only 40 per cent of its sales. By that logic,
Kraft Heinz would then be getting the rest of Unilever effectively for no premium.

The group studied 3G-backed takeovers and concluded Kraft Heinz would try to seem as friendly as possible and then increase
its bid in increments until there was sufficient pressure from Unilever investors. This was 3G’s modus
operandi. “We didn’t want to get in that situation, so we needed to hit them early. Our best chance was
to get them off the pitch early,” said another person involved in the company’s defence.

They decided that Mr Polman should press ahead with a long-planned trip to Southeast Asia to not raise suspicions.

Because Kraft Heinz’s courtship was so young, secrecy became paramount to the success of its bid. But by last Wednesday,
some investors and journalists had been notified about unusually high options trading in Unilever’s US-listed
shares.

The next day, Kraft Heinz reported lacklustre quarterly results that investors saw as a sign that the company’s cost-cutting
had reached a limit. Shares in the company sank 5.5 per cent.

Meanwhile, the Kraft Heinz board, which includes Mr Buffett, was holding a tense meeting. They feared that news of their
bid was about to spill into the market, said two people briefed on the mood at that gathering. “The goal
was to try to delay the leak as much as possible,” one of the people said.

By mid-morning on Friday, they were proved correct. The FT’s Alphaville blog revealed the details of the Kraft Heinz bid.
Within half an hour, the US company confirmed it had “made a comprehensive proposal to Unilever about combining
the two groups”. It added that the offer had been rejected but suggested that the door was still open.

Unilever slammed the door shut an hour later. In an unusually terse rejection, it said the Kraft Heinz offer “fundamentally
undervalues” the company and that the proposal had “no merit, either financial or strategic”.

Kraft Heinz had expected its first offer to be rejected but was caught off guard by the harsh language Unilever used. “Everyone
thought there was a relationship of mutual respect but clearly they went out strong on the culture stuff . . . making
Kraft Heinz look like the bad guy and Unilever as the angel,” a person close to the US company said.

Kraft Heinz’s advisers at Lazard and law firm Paul Weiss, its top management and 3G executives regrouped later on Friday
to find a new way forward. Additional advisers including PR companies Finsbury and Joele Frank were brought
on. Shares in both companies soared to close the week. The US group was willing to pay substantially more.

However, more fissures appeared. UK politicians started voicing their concerns about another large British-based company
being scooped up on the cheap by a foreign rival. Unilever could have ended up becoming the third major
UK company to be acquired since the Brexit vote after chip designer ARM Holdings and pay-TV broadcaster
Sky.

Under strain ahead of negotiations with the EU, the May government has further pigeonholed itself with its tough talk on
a strong industrial policy that protected British companies and jobs. Shuttling between London and Paris
to deal with the fallout of a proposed Peugeot-Vauxhall deal that could see thousands of jobs shed, Greg
Clark, UK business secretary, spoke with Mr Behring and Sue Garrard, head of communications at Unilever.

Downing Street instructed officials to look at Unilever’s business in the UK and whether a Kraft Heinz bid would raise any
policy issues, including over the future of the company’s British headquarters, its UK listing, jobs, and
research and development.

Back in London on Saturday, as Mr Polman tapped into his network of contacts, he was informed that Finsbury was working with
Kraft Heinz on PR. Within seconds, Mr Polman blasted off an email to Sir Martin Sorrell, the founder and
chief executive of WPP, the advertising company that counts Unilever as one of its most important clients.

Finsbury, which is majority owned by WPP, was removed from the Kraft Heinz side by the end of the day.

'A surgical decision'

On Sunday morning in London, people close to Kraft Heinz said the US company was determined to make a series of concessions,
including taking on Unilever’s name after the merger as well as offering guarantees to maintain R&D
investments and headquarters in the Netherlands, UK and the US.

But Mr Behring, Mr Lemann and Mr Buffett received a letter from Mr Polman outlining his hostility to a deal. They decided
then it would be better to retreat sooner rather than later. “It was a surgical decision,” said a person
close to the trio. “There is little space for emotions in these circumstances.”

Some of the brands owned by the two companies

At 5:31pm a joint statement by Unilever and Kraft Heinz put to rest any hopes of a deal. It said: Kraft Heinz has the utmost
respect for the culture, strategy and leadership of Unilever.

Although it would be foolish to rule out a 3G-inspired comeback of Kraft Heinz for Unilever, the Brazilian management cannot
return for at least six months under UK takeover rules.

The ultimate decision to pull the plug on the effort was made by the two key billionaires backing the transaction — Messrs
Buffett and Lemann, who wanted to avoid a potentially dirty and public takeover battle.

One person close to Unilever said: “From the lunch, Kraft Heinz should have got the impression that they had got it all wrong.”

Another says 3G and its portfolio companies have a clever way of doing business: “Extreme aggression with a smile, so we
gave them extreme rejection with a smile.”

Undeterred by defeat, 3G’s Mr Lemann and his lieutenants are already planning their next move. A $15bn war chest is at their
disposal, ready to hunt the next consumer goods monster.

Healthcare companies have announced almost $30bn of acquisitions since the beginning of the year in the sector’s strongest
start for dealmaking in more than a decade, as Big Pharma scrambles to replace ageing blockbusters by paying
top dollar for new medicines.

Executives, lawyers and bankers said the January deals frenzy could be a sign of things to come in 2018, as large US drugmakers
snap up innovative rivals by spending billions of dollars of cash freed up by Donald Trump’s tax overhaul.

Sanofi, the French pharma company, and Celgene, the US biotech group, unveiled two acquisitions on Monday worth more than
$20bn, taking the total value of global healthcare deals announced so far this year to $27bn, according to
figures from Thomson Reuters.

That represented the best start to a year for healthcare dealmaking since at least 2007, Thomson Reuters said.

Both drugmakers offered hefty premiums to seal the deals, with Sanofi paying $11.6bn for US haemophilia specialist Bioverativ
— 63 per cent more than its undisturbed share price.

Celgene agreed to pay $9bn for Juno, a biotech group developing experimental cell therapies for cancer. The price was almost
twice what the Seattle-based company was worth before rumours of a deal prompted a spike in the value of
its stock last week.

So far this year, buyers of healthcare companies have agreed to pay an average premium of 81 per cent, according to data
provider Dealogic — well above the 42 per cent typically paid in 2017.

Their willingness to agree to such lofty prices underscores a perennial problem for Big Pharma: what to do when successful
medicines lose patent protection and revenues evaporate.

Sanofi is trying to offset declining sales of its top-selling insulin, Lantus, which has lost market share following the
introduction of cheaper “biosimilar” versions. Celgene is preparing for the loss of patent protection on
its top cancer medicine, Revlimid, which will face generic competition from 2022 at the latest.

“As Big Pharma is confronted with drugs going off patent and weak research and development pipelines, they have no choice
but to do significant acquisitions despite pushing valuation metrics,” said Frank Aquila, a senior corporate
lawyer at Sullivan & Cromwell.

Large drugmakers have often turned to buying smaller biotech groups to replenish flagging pipelines, but a steady increase
in the value of such companies has prompted some in the industry to warn of a bubble.

Some executives say the sector could continue to overheat as an indirect consequence of President Trump’s tax reforms, which
have enabled large pharmaceutical groups to access billions of dollars of cash that was trapped overseas.

“Given the access to cash that this pool of companies now has, will we see the value of potential targets run up? I do think
that’s a risk,” said Rob Davis, chief financial officer of Merck, in a recent interview with the Financial
Times.

Mr Aquila added: “The new US tax law puts more cash in buyers’ hands and lower rates make more deals accretive. It’s a powerful
combination.”

Baker McKenzie, an international corporate law firm, predicts the tax overhaul will help push the value of global healthcare
deals to $418bn this year, up 50 per cent compared with last year.

The chief executive of GlaxoSmithKline has said the UK drugmaker will stop “drifting off in hobbyland” by producing medicines
with little prospect of billion-dollar sales, as she seeks to reverse years of underperformance in research
and development.

In her first interview since taking the helm in April, Emma Walmsley also disclosed that she will overhaul the company’s
incentive structure in an effort to sharpen accountability. Senior executives will see a higher proportion
of their bonus targets focused on the performance of their own part of the business, rather than the group
overall.

“I want everyone who’s working on the pharma business to be incentivised to win in the pharma business, not incentivised
for some random corporate thing,” she said.

GSK is widely seen as having failed to nurture blockbusters — drugs with $1bn-plus sales — to guard against income lost from
the end of patent protection on Advair, its asthma treatment, which at its peak of £5.27bn annual sales made
up about one-fifth of overall revenues.

Ms Walmsley, who has spent much of the past four months analysing the failings of the R&D division, said the company
had produced a high volume of new launches but that most had not yielded large sales. Late last month she
announced she was scrapping 30 clinical and pre-clinical programmes.

For many of GSK’s long-serving scientists the change of approach was difficult, she acknowledged. “If you’ve been working
on an asset for decades in R&D it’s very hard to decide it isn’t important enough to take forward . . . so
it’s not surprising that people’s human motivation is to keep progressing stuff,” she said.

However, drugs had been allowed to “go through too late and too far” without a rigorous assessment of their commercial potential.

GSK had also been too atomised, she suggested, structured as “an R&D organisation, a commercial organisation, a supply
chain organisation and a bunch of head office people, not with the same strategy”.

She added that Jack Bailey, GSK’s US head of pharmaceuticals, and Luke Miels, who next month takes up the post of global
head of pharma, would be given a far bigger, and earlier, voice in deciding which assets to pursue, based
on their commercial potential. “We need to put the discipline in place,” she said.

Mr Bailey’s expanded role reflects a greater focus on the US, which Ms Walmsley said was “the biggest market and it’s an
innovation-friendly market so it’s important that we play there competitively and we have room for market
share growth . . . definitely in HIV and respiratory”.

Ms Walmsley also implied that the company may have become too risk averse following events three years ago when it was fined
almost £300m after being found guilty of bribery by a Chinese court.

She said: “When you go through some of the things we’ve been through as a company, particularly in 2014 . . . people can
become afraid to make big bets and by definition in our industry you are making big bets on science.

“You should always be afraid of breaches of compliance. That’s unforgivable. But being unafraid of failure is something I
want to bring back because we have to be creative, whether that’s in our brands, in our consumer business
or the invention of new drugs.”

GlaxoSmithKline is eyeing potential acquisitions from Pfizer in the US and Merck in Germany as the UK drugs group considers
bulking up its consumer division.

Delivering third-quarter results, Emma Walmsley, chief executive, said that, as a world leader in consumer healthcare, GSK
“would look at these assets . . . in terms of their complementarity to our power brand strategy and our geographic
footprint”.

Ms Walmsley also called for as much transparency “as soon as possible” on the UK’s post-Brexit regulatory and immigration
regimes and revealed that GSK was planning to build new drug-testing centres in Europe to ensure supplies
of its medicines are not disrupted.

Pfizer said this month it would sell or spin off its consumer healthcare business, while Merck is also exploring the sale
of its operations in the sector, with a decision by the end of next year.

Ms Walmsley pointed out, however, that Pfizer — whose consumer division has been valued at $14bn — had only announced the
potential divestment last week. It was “extremely early” and the US company had not even confirmed the business
was for sale.

GSK would “stay focused on returns” and M&A in the consumer field “does not change our priorities in terms of capital
allocation”, she added.

The main focus remained on the core pharma business “and R&D within that”, said Ms Walmsley, who in July announced GSK
was scrapping, or partnering on, about 30 drug development programmes as it sharpens its focus on commercial
returns from its drugs portfolio.

Total revenues at the UK’s largest drugmaker increased 11 per cent year on year to £7.8bn in the three months to September
30, in line with analyst forecasts. Growth was boosted by the weak pound, and sales rose 3 per cent at constant
exchange rates — the same as the second quarter.

Pharmaceuticals and consumer healthcare sales increased but sales of vaccines were flat after accounting for exchange rate
movements. The company blamed increasing competitive pressure on some of its diphtheria, tetanus and whooping
cough vaccines.

Adjusted profit before tax rose 7 per cent year on year to £2.3bn, slightly better than consensus forecasts. Adjusted earnings
per share were also slightly above expectations at 32.5p.

Jeffrey Holford of Jefferies, the investment bank, said performance of the pharma division had been weaker than expected
but this had been offset by a stronger-than-predicted performance in consumer.

Ms Walmsley went on to outline “contingency planning” under way for Brexit. Although GSK did not expect Britain’s departure
from the EU to have “a material impact”, it would involve “real costs”, including the construction of new
testing facilities across Europe.

Calling for clarity on an implementation period of at least two years, she suggested that health was as key an issue as security
and defence. “Fundamentally, we are talking about the supply of vital medicines and the security of supply,
both into the UK and back into Europe,” she said.

GSK shares were down almost 2 per cent at 1,485.34p in afternoon trading in London.

Sanofi, the French pharmaceutical company, says it plans to agree the sale of its European generics business in the third
quarter and expects to return to earnings growth in 2018.

Announcing full-year results for 2017 on Wednesday, Sanofi said it has narrowed the list of buyers for its roughly €2bn European
generics business to a handful of private equity firms and drugmakers.

Private firms that have made it through to the second round of bidding include Advent International, BC Partners, Carlyle
Group and a consortium of Blackstone Group and Nordic Capital, as well as at least one pharma company, according
to people familiar with the process. The interested buyers are performing due diligence. The private equity
groups all declined to comment.

Under pressure to make up for declining revenues from its diabetes franchise, especially in the US, and following several
failed deals, Sanofi in January announced two biotech acquisitions: Bioverativ for $11.6bn and Ablynx for
€3.9bn.

Olivier Brandicourt, Sanofi chief executive, said on Wednesday: “Overall, after a period of significant reshaping since 2015,
we are positioned to drive growth in 2018.”

The drugmaker said it expects underlying earnings per share to rise between 2 per cent and 5 per cent in 2018 at constant
exchange rates, ahead of a 0.4 per cent drop in 2017. It expects foreign exchange moves to have a negative
impact of between 3 and 4 per cent for the year.

Sales rose 4.1 per cent at constant exchange rates in the fourth quarter to €8.7bn, in line with a Reuters poll of analysts.
Revenues at Sanofi’s diabetes and cardiovascular division fell 19 per cent in the period to €1.3bn.

Underlying net income dropped 10.8 per cent at constant exchange rates during the three months to €1.3bn, below Reuters analyst
estimates of €1.46bn.

The group said that it booked an impairment charge of €87m during the quarter, related to its drug Dengvaxia, the world’s
first dengue vaccine and which is at the centre of a health scare in the Philippines. Mr Brandicourt said
Sanofi remained “very committed” to Dengvaxia, adding that “we have absolutely no evidence that the vaccine
has been linked to any deaths”.

Sanofi’s shares shed 2.6 per cent in Wednesday morning trading to sit at €65.80, down 13 per cent on the year.

Private equity bidders for the European generics business are likely to talk up their healthcare experience to convince Sanofi
they are more suitable buyers than corporate bidders, as they come under pressure from their large institutional
investors to invest money, said people with direct knowledge of the process. However these private equity
funds will face steep competition from cash-rich trade buyers that can make a case for synergies easily.

Amgen, the world’s largest biotech company, has said it is “looking hard” for deals to deploy its $27bn cash pile but warned
it is struggling to find targets amid soaring valuations in the life sciences sector.

The note of caution comes as mergers and acquisitions activity in the healthcare sector recorded its strongest start to a
year in more than a decade, with almost $32bn of global deals announced since the start of January.

However, buyers have been offering record premiums to clinch deals, with Celgene agreeing to pay $9bn for cell therapy group
Juno — almost twice its undisturbed market value. Sanofi paid a 63 per cent premium for haemophilia specialist
Bioverativ.

“We want to deploy any excess cash and our first priority is to do acquisitions and invest in the business,” said David Meline,
Amgen’s chief financial officer, in an interview with the Financial Times.

But he added: “We see all of these deals announced, and we participate pretty actively in considering whether to bid, but
we haven’t been able to come up with a business case that would make a return for our shareholders.

“We will keep pushing ourselves and keep looking ourselves, because we have lots of financial flexibility.”

He cautioned it would be difficult “as long as people are willing to pay levels above what we deem we can make a return on”.

Mr Meline was talking before the recent market gyrations, which have sent valuations for biotech groups lower.

Amgen’s stance runs counter to predictions of a deals frenzy from bankers and lawyers, who say they are working on more M&A
leads than they have done in years.

The company’s warnings on valuations carry additional weight because it is among the pharmaceutical companies with the most
firepower to do big-ticket acquisitions.

In a recent note to investors, Geoffrey Porges, an analyst at Leerink, estimated that Amgen had as much as $70bn in dry powder
that could be spent on M&A, including $27bn of available cash; the ability to easily raise $40bn on debt
markets; and $3bn in retained free cash flow.

Mr Porges suggested that Amgen would need to do a deal at some point, given that its product sales declined last year, while
the launch of its new cholesterol drug Repatha has fallen short of Wall Street’s expectations.

“Amgen’s growth outlook is not exciting, and the pressure on its legacy products is only going to increase.” said Mr Porges.

He added: “We expect big things, which are most likely to be dilutive to margins and earnings near term, but to confer some
growth and further diversification longer term.”

With 123,000 employees, almost $50bn in annual sales and a $200bn-plus market capitalisation, the status of Novartis as a
leading Big Pharma company is beyond doubt.

Yet management, staff and shareholders know that the past five years have been a struggle. Now, critical choices about asset
disposals and investments are looming for the Switzerland-based group.

How it makes them will define the place of Joseph Jimenez, chief executive since 2010, in corporate pharmaceutical history.

Some of Mr Jimenez’s decisions ought to be easier than others. Should Novartis sell its 36.5 per cent share in a consumer
health joint venture with GlaxoSmithKline, the UK drugmaker? Many shareholders think so. Novartis has the
option to compel GSK to buy its stake this coming March. A sale might raise $10bn.

Novartis is undoubtedly examining the ways in which it might put such a tidy sum to use.

Acquisitions to fill holes in its pharma portfolio, or to expand its generics business, would do the trick. If such opportunities
open up, then it will make more sense to sell than to stay hooked up with GSK, even though the joint venture
is doing well and growing in value.

Novartis amassed the stake, amounting to 6 per cent of Roche’s shares but a third of the voting stock, between 2001 and 2003.
The idea was to prepare the ground for a full merger, but that did not happen. These days it is perfectly
clear that it never will.

The most vexing issue is what to do with Alcon, the eyecare division for which Novartis paid Nestlé $51.6bn in 2010.

Like the Roche stake, the Alcon purchase was a throw of the dice for which Mr Jimenez bears no responsibility. Rather, it
is part of the mixed legacy of Daniel Vasella, the former Novartis patriarch who founded the company in 1996
by merging Ciba-Geigy with Sandoz.

When Novartis reported its second-quarter results on July 18, it offered some rare good news about Alcon, predicting that
the division would record a modest increase in full-year 2017 revenue.

Yet Alcon has fallen well short of the high hopes placed on it seven years ago. If Daimler’s acquisition of Chrysler in 1998,
followed by its sale at a vast loss in 2007, was the worst ever deal in the car industry, then Novartis’s
purchase of Alcon is arguably its nearest equivalent in the pharmaceutical sector.

Alcon’s difficulties are by no means the only factor in Novartis’s underperformance, as measured by net sales and operating
profit. Also important are the expiry of the company’s patents for blockbuster drugs and intense price pressures
in the US market.

The financial costs and disruption to Novartis stemming from various legal tangles in Russia and South Korea have not helped,
either.

Still, Alcon is the problem that sticks out. Novartis executives speak bravely about a business that has turned the corner
and, after a few more profitable quarters, will be ready for a sale, spin-off or initial public offering.

However, most estimates of Alcon’s value range from $25bn-$35bn. Even at the top end, that could represent a staggering loss
on the sum Novartis splashed out in 2010.

The Alcon business up for review does not include the ophthalmic pharmaceuticals division that was moved into another part
of the Novartis business in 2016, and which generated around $5bn in annual sales

However, this is less of a concern than what Novartis would do with the money it would receive if it were to dispose of Alcon,
its Roche stake and its share of the GSK-led joint venture.

All told, Mr Jimenez might have $50bn-$60bn to play with. The last thing investors want to see is another Alcon-type purchase
whose value melts like a Swiss glacier.

They can comfort themselves that Mr Jimenez is not Mr Vasella. Novartis has no need for one “transformational transaction”
in the near future, Mr Jimenez says. Carefully targeted, less expensive acquisitions are more likely.

Besides that, investors should keep in mind that Novartis has one of the industry’s finest reputations for scientific research.

As of December 2016, it had more than 200 projects in clinical development. One particularly promising drug, used for treating
leukaemia in children and known as CTL019, is moving closer to the market.

Such breakthroughs require a generous budget. If Novartis sells Alcon or other businesses, it will surely invest some of
the proceeds in research — and investors should welcome that.

Every time Amazon enters a sector the stock prices of its listed potential competitors tank. Last year’s purchase of the
upscale Whole Foods sent shares of fellow grocer Kroger and general retailers Walmart and Target down more
than 5 per cent in a single day. Fear of the ecommerce giant is also credited with prompting drugstore chain
CVS to acquire health insurer Aetna in December.

No surprise then that the US healthcare sector sold off sharply after Tuesday’s vaguely worded announcement that Amazon was
teaming up with JPMorgan and Berkshire Hathaway to form a not-for-profit aimed at cutting healthcare bills.

The investor panic is rooted in legitimate fear. Since its 1994 founding, Amazon has seriously disrupted bookselling, general
retail and cloud computing. Along with Netflix, it is reshaping video distribution and is moving hard into
grocery delivery and fashion. Its much-hyped convenience store without checkout lines, which opened last
month, has helped prompt similar experiments by retailers around the world and led to apocalyptic predictions
of the death of millions of retail jobs.

Founder Jeff Bezos sets pulses racing in part because of his demonstrated willingness to invest for the long term, forgoing
immediate profits in favour of building market share. Despite its size, Amazon’s quarterly profits have only
just pushed past the $1bn barrier. Boosted by $789m in US tax reform benefits, it ended up with $1.9bn in
net income on $60.5bn in revenue. By contrast, Apple reported the best quarter in US history, $20.1bn in
net profits on $88.3bn in revenue.

But Amazon is not infallible or invulnerable. Its foray into telecoms was a disaster. The Fire phone was on sale for barely
a year, and led the company to take a $170m writedown before killing off the project in 2015. Similarly,
Amazon Local, its effort to push into the daily deals and coupons business pioneered by Groupon, shut down
in 2015 after barely three years.

Perhaps more on point, Amazon has already taken one unsuccessful run at pushing down consumer healthcare costs with the 1999
purchase of a big stake in drugstore.com. After failing to bring down prices or attract enough business,
Amazon capitulated and sold the ecommerce website to traditional drugstore chain Walgreens in 2011.

As an American, I know from experience that the healthcare sector is ripe for disruption. There has to be a better way than
a system that required phone calls to convince my insurer to pay for my new son’s hospital stay. (Although
it had covered all my prenatal expenses, the insurer initially insisted he was not mine because he did not
share my last name.)

But Amazon has historically done best in categories where it can grab a substantial or dominant share of the market. Driving
out weak competitors and pushing down supplier prices are key parts of its business model.

The healthcare venture, by contrast, is starting very small — JPMorgan, Amazon and Berkshire have only 1m employees combined.
The companies plan to focus on “technology solutions” to lower costs. But the big savings from negotiating
better prices from doctors and pharma groups would require greater scale. Another employers’ consortium covering
7m workers has been trying to do the same thing without clear benefits.

This is one sector where I genuinely hope that Amazon succeeds but I’m not ready to bet the house on it.

Last March, I wrote a column arguing that US employers should be the first in line to argue for healthcare reform. Unlike
their peers in the rest of the developed world, American companies are liable for covering healthcare insurance
costs for two-thirds of the country’s population. Even if the country’s healthcare spending wasn’t double
most of the rest of the rich world’s, with far worse outcomes, this would still be a competitive disadvantage
in a global marketplace in which rivals don’t have to shoulder that burden.

It is exciting, therefore, that three powerhouses of US business — Warren Buffett, Jeff Bezos and Jamie Dimon — are taking
on this issue by launching an organisation, backed by the combined $1.62tn market cap of their own companies,
that aims to deliver “simplified, high-quality and transparent healthcare at a reasonable cost”.

But which part of the Gordian knot of US healthcare will they be able to unravel, what difference will it make and to whom?
The US has a healthcare system that is totally opaque (amazing but true — we commit to paying for services
before we know what they cost), inefficient (markets are hyper-local and relatively low-tech) and bifurcated
— the rich and poor have wildly different levels of care and outcomes. Together, these three issues have
an impact on productivity and growth, not to mention economic volatility for average people. Healthcare emergencies
and the costs that result are the number one reason for personal bankruptcy in the US.

Rising prices mean that health benefits now make up about 20 per cent of total worker compensation (up from 7 per cent in
the 1950s), which is a contributor to wage stagnation. That is, in turn, a key reason economic growth in
the US isn’t higher.

Already corporate conglomerates such as the Healthcare Transformation Alliance, a group of 46 large companies, have tried
to tackle this. But since the US has no single national healthcare market, contracts and discounts must be
negotiated with individual insurance companies, hospitals and providers.

While politicians, including US president Donald Trump, argue that selling insurance across state lines could solve these
problems, the truth is that healthcare in the US is a very local business. The ability to leverage economies
of scale depends on the number of employees that you can sign up to a particular provider. This is a paradigm
better suited to an old model of jobs for life than the 21st-century gig economy. The triumvirate of Messrs
Buffett, Bezos and Dimon may be able to lower costs for their own workers — whether they can do it for others
without structural shifts in the healthcare industry is doubtful.

A bigger pay-off could come if the triumvirate invests in more innovative methods of delivering care. Healthcare is one of
the least digitised industries in the US, according to the McKinsey Global Institute, which makes it an obvious
target for a company such as Amazon (though it must be very careful to safeguard patient data and not use
it for other commercial purposes). There is also low hanging fruit in developing “bundled” payments, in which
a group of services are offered for a fixed price.

Having given birth to two children at a National Health Service hospital in the UK, I was always amazed that I could have
all my needs — from basic check-ups to specialist visits — provided quickly and efficiently in the same place.
Every provider had access to all my medical information digitally. The fact that this still isn’t the case
in America tells you how far the country has to go.

And yet the biggest challenge in the US healthcare system isn’t technical, but existential. Americans have a sense of entitlement
about many things and healthcare tops the list. Most rich countries decided decades ago that it makes economic,
political and moral sense to provide a basic level of care for all citizens, rather than offering everyone
the “option” of the most cutting-edge medical treatments, whatever the cost.

Yet Americans still hold fast to a mythology that “choice” is what makes the system fair. No matter that fewer and fewer
people have any kind of choice at all — particularly now that Obamacare’s individual mandate, which required
everyone to have some form of medical coverage, has been repealed by Mr Trump. Medicare, the US’s version
of the NHS for the elderly, provides a basic safety net, but it also subsidises a variety of costly and questionable
treatments, money that could be better deployed offering more people more basic services. We refuse to have
a real debate about the fact that resource-draining end-of-life care constitutes the largest share of medical
spending.

In short, we prioritise the individual over the collective, in healthcare as in most areas of our society.

It is the American way. But it’s no longer sustainable. Mr Buffett is right that healthcare costs are a “hungry tapeworm”
eating away at our economic growth and prosperity. The best way to fix the situation would be to do what
every other advanced economy has done and move to a nationalised system. But in lieu of this (as of yet)
politically unfeasible solution, I’m glad that some of the smartest business people in the country are agitating
for change.

Apple is preparing to launch a network of medical clinics for its employees and their families, in what could be a way for
the tech company to test out its broader ambitions in healthcare.

Tim Cook, Apple’s chief executive, recently described the healthcare industry as an area where the company could make a “meaningful
impact” but the iPhone maker has been typically secretive about its plans.

The discovery of a website for an organisation called the AC Wellness Network provides a clear hint that Apple’s ambitions
extend beyond digital health devices such as its Watch.

According to records from the Internet Archive, the domain name acwellness.com was bought, presumably by Apple, sometime
in the second half of last year.

News of AC Wellness was first reported by CNBC. Apple did not immediately respond to a request for further comment on its
plans or the website.

Apple’s apparent move into medical services follows Amazon’s plan to partner with Berkshire Hathaway and JPMorgan Chase to
create a new not-for-profit healthcare company to try to lower healthcare costs for their collective 1m employees.
The trio’s intention to extend the new company’s services to “potentially all Americans” wiped tens of billions
of dollars from the market capitalisation of traditional healthcare companies such as Walgreens Boots Alliance
last month.

While the scope of Apple’s health centre initiative is still unclear, the world’s most valuable company has been making slow
but steady inroads into the health market for several years.

After the launch of Apple Watch in 2014, it has used its HealthKit and ResearchKit software and data platforms to connect
its users’ health information across third-party apps and into clinical research projects.

Apple is working with Stanford University on a study to see if the Watch’s sensors can detect heart abnormalities. With a
forthcoming software update, iPhone owners will be able to download their electronic medical records from
some US hospitals.

At Apple’s annual shareholder meeting this month, Mr Cook was critical of the US healthcare and insurance system, saying
that it “doesn’t always motivate the best innovative products”. Healthcare companies design for reimbursement
rather than patients’ best interests, he said.

“We are in this really great position that we can do what we’ve always done, which is look at it as the user looks at it,”
Mr Cook said. “The more and more time we spend on this, the more and more excited I am that Apple can make
a significant contribution to people’s lives in this area.”

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Big pharma thinks it has spotted its next big opportunity — an untreatable silent killer that affects millions of people.

In recent months, large drugmakers including Allergan, Gilead and Novartis have collectively spent billions of dollars acquiring
or licensing medicines designed to treat a liver disease that few people have heard of — non-alcoholic steatohepatitis,
or Nash.

This advanced form of fatty liver disease causes scarring and inflammation of the liver and is thought to affect more than
16m people in the US, according to Bernstein, the investment bank.

In the most serious cases, the illness causes fatal cirrhosis, while also increasing a person’s chances of developing liver
cancer or heart disease. The US Centers for Disease Control believes there are roughly 20,000 fatalities
each year from chronic liver disease or cirrhosis that are not related to alcoholism.

Drugmakers are betting that the number of people with Nash — which is more common in overweight people — will rise dramatically
in the coming years because of the worldwide obesity epidemic. Some analysts are predicting the global market
for Nash medicines will be worth as much as $35bn a year at its peak.

There are no approved drugs to treat the condition but pharmaceutical groups are studying more than 25 experimental compounds
in humans, with four medicines either being studied in phase III clinical trials, or about to enter this
final stage of testing.

Of the large drugmakers, Allergan is furthest ahead, having spent $1.7bn to acquire Tobira, a San Francisco biotech group,
in November last year. Tobira’s main medicine, Cenicriviroc, will enter phase three trials later this year
with results expected as early as 2019.

“Nash is now the leading cause of liver cirrhosis and cancer, having taken over from hepatitis C,” says Dr David Nicholson,
Allergan’s chief research and development officer. “And at the moment, there’s nothing out there to treat
it.”

Gilead has entered the field too, recently acquiring Nimbus for up to $1.2bn, while also investing heavily in its internal
research efforts. The West Coast-based biotech company has already had huge success with its treatments for
hepatitis C, another potentially fatal liver disease.

Several other well-known pharmaceutical groups, including Novo Nordisk and Shire are working on Nash drugs at an earlier
stage of development.

However, the two companies that are most advanced do not come from the ranks of big pharma: Intercept Therapeutics, a New
York-based biotech group, and GenFit, its French rival.

Shares in Intercept jumped 13 per cent last week after the company said it had redesigned a late-stage clinical trial of
its drug, obeticholic acid, in a way that would make it easier for the study to succeed.

Following discussions with the US Food and Drug Administration, Intercept said the trial must now show that the drug can
either resolve Nash or improve “fibrosis” — the medical term for liver scarring. Previously, the company
would have had to prove the medicine could do both.

Intercept also said it would be able to analyse the data once it had enrolled 750 patients, rather than 1,400, after the
process of recruiting patients to the trial took longer than the company had originally expected.

The changes reflect the flexibility of regulators at the FDA, who want to encourage drugmakers to invest in researching medicines
for the untreatable condition before the number of sufferers increases rapidly.

However, the sluggish recruitment to Intercept’s trial is indicative of one of the biggest hurdles facing Nash drugmakers:
the disease is very difficult to diagnose.

The vast majority of people do not realise they have the “silent” disease, which only causes symptoms such as jaundice, fatigue
and weight loss in the very late stages.

Doctors sometimes suspect a patient has Nash when they have elevated liver enzymes in their blood or when they spot abnormalities
during ultrasound scans.

But the only surefire way of diagnosing the disease is to carry out a liver biopsy — a complex, invasive procedure that requires
an anaesthetic. In rare cases, the biopsy can cause bleeding that requires a transfusion or surgery.

Many patients are reluctant to undergo the procedure, which poses a difficulty not just for recruiting them to clinical trials,
but also convincing people in the real world to get tested for the condition.

Drugmakers are hoping that less invasive tests will be developed that use biological clues or “biomarkers” to diagnose the
disease without the need for a biopsy.

“We really believe that there will be big breakthroughs that will make it much easier for physicians to diagnose the disease
and subsequently to utilise the drugs in development,” says Dr Nicholson.

One option is a simple breath test, according to Dr Ilan Yaron, chief medical officer of Tiz Pharma, a London-based biotech
group that is about to start testing its Nash drug in humans. “The FDA does not recognise these tests yet,
but it will in time,” he says.

However, even if drugmakers find a reliable, non-invasive way of diagnosing the disease, there is no guarantee that Nash
sufferers will rush to start taking their medicines.

The disease progresses slowly and many sufferers will die of something else; given the lack of symptoms, people could be
wary of taking a drug for life when they feel perfectly well.

“I’m sceptical as to whether this is actually needed for most people,” says Ronny Gal, analyst at Bernstein. “You’re essentially
trying to put into chronic treatment forever a broad population that will probably never develop the most
serious form of the disease.”

Cash-strapped healthcare systems could resist paying for the drug in all but the sickest patients, predicts Mr Gal. These
number approximately 1.5m in the US.

For that reason, he believes the market for Nash drugs will be much smaller than many others on Wall Street are expecting,
and is pencilling in peak sales of $8bn for what he describes as a “midsize condition”.

“If you take all the people with advanced Nash and ask how many people will end up becoming seriously ill in their lifetimes,
the number could actually be very small,” he says.

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Donald Trump has rocked the pharmaceutical industry by unexpectedly warning that his government will push for lower drug
prices in his latest broadside against big business.

In the opening remarks of his first press conference since the US election, Mr Trump chose to single out pharmaceutical companies
for criticism by saying they were “getting away with murder” by charging too much for their products.

The president-elect’s comments sent the shares of drugmakers, including Johnson & Johnson and Pfizer, tumbling as the
sector joined carmakers and other industries that Mr Trump has roiled with verbal rejoinders and tweets.

“We’re the largest buyer of drugs in the world and yet we don’t bid properly,” Mr Trump said.

His comments caused a knock-on effect in Asia, where pharma groups worried about potential price pressures in the world’s
largest and most profitable drugs market.

The US government has huge potential clout as a drug buyer via the multibillion-dollar Medicare and Medicaid health programmes
for the elderly and poor, but the pharmaceutical industry has supported existing restrictions on the use
of its power.

“If I were a drug company executive and I heard that from a president I would be reaching for my heart medication,” said
Joe Minarik, a healthcare expert and former senior economist in the Clinton administration.

The White House could also influence drug prices in the private market by empowering regulators to penalise companies for
“unjustified” price rises or encouraging the development of alternative treatments — two proposals Hillary
Clinton, the defeated Democratic presidential candidate, made on the campaign trail.

The Nasdaq biotechnology index was down as much as 3.7 per cent in early afternoon trading on Wednesday, cutting its gains
for the year to under 5 per cent.

Larger drugmakers also faced selling pressure: J&J, the biggest US pharma group, was recently down by 1 per cent, while
rival Pfizer fell 2.2 per cent.

Perceiving risks in Obamacare, the pharmaceutical industry in 2009 struck a deal to contribute $80bn over 10 years to help
fund health reform in return for policymakers dropping plans to let the government negotiate drug prices
for people on Medicare, a health plan for the elderly.

Mr Trump has pledged to repeal Obamacare, one of President Barack Obama’s signature achievements.

“There’s been very little bidding on drugs,” Mr Trump said, adding that “we’re going to save billions of dollars”.

The broad stock market also turned red after Mr Trump’s news conference began, led lower by the healthcare sector. The S&P
500 index was off by 0.1 per cent, reversing a rise of as much as 0.3 per cent.

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Market Dashboard

Market Dashboard

Your “springboard” guide to current market concerns, presented in a logical and concise manner, with direct
links to more details.

Volatility winners (new)

S&P 500 nears key level

Cboe’s troubles

EMs turn to local debt

Expect more dividend cuts in UK

The sudden upsurge in volatility has been a boon for the market’s intermediaries. For high-frequency traders the last 10
days have been an oasis in the desert.

Most of these companies, such as DRW Holdings, Citadel Securities and Two Sigma, account for the majority of volume on global
equities, futures and foreign exchange markets.

They use their own money to trade and quote bid and offer prices, and earn profits by using computer algorithms to exploit
differences in the spread between bid and ask prices, ending the trading day with minimal open positions.

After a boom during the financial crisis years, the industry has been hard hit in recent years by low volatility, rising
technology costs and a regulatory crackdown on behaviour and practices in electronic trading. Many of the
smaller market competitors have been sold to rivals.

Most are small and private but two, the US’s Virtu Financial, and Flow Traders of the Netherlands, are listed on their home
markets, with market capitalisations of $5bn and €1.4bn respectively. Shares in both have surged by more
than a quarter in the last seven days on investors’ hopes that higher market volatility will lead to improved
corporate profits.

“The environment where you have a lot of price changes during the day is the ideal environment for a market maker,” said
Doug Cifu, chief executive of Virtu.

For him last week’s blow-up in products related to the performance of the Vix volatility index was not an issue. “We make
markets in 2,000-ish exchange-traded products around the world and if a small handful of them are having
issues, it really has no impact at all on our performance going forward.”

But investors should be wary; there have been notable spikes in volumes and volatility in the past and it has not translated
into sustained earnings. Whether this is cyclical or temporary remains to be seen.
Philip Stafford

The S&P 500 has entered official correction territory, having fallen more than 10 per cent from its peak of 2,872 late
last month. Selling has been concentrated in US large-cap equity funds, tech and healthcare, says Bank of
America Merrill Lynch in their weekly review of investor flows that includes Monday’s rout on Wall Street.

Some measure of support should beckon in the form of the 200-day moving average at 2,538. The market last tested the 200-day
MA just before the US election presidential election in November 2016.

BofA thinks this level represents a good entry point in the coming weeks.

One element of caution is that when the 200-day breaks, the market can take a while to heal its wounds. At the start of 2016,
the S&P broke down and didn’t climb back above this measure of momentum until mid-March. This reflects
how the process of creating a market low takes time or, in other words, we need to see the S&P 500 bounce
up and down and make a second test of a certain level (1,810 in January, and February of 2016 was the low
point for that correction)

Another important point is that plenty has changed in the past two years, not the least a gain of more than 40 per cent in
the S&P 500 from its mid-March 2016 nadir. Then, investors worried about a China-led global economic
slowdown. Falling bond yields and still very accommodative central banks ultimately helped equities find
their footing.

Now the worry is higher bond yields and inflationary concerns as the global economy boasts its best run of synchronised growth
since the financial crisis.

Next week’s US inflation data looms as a critical piece of the puzzle facing investors and likely determines whether we get
some relief or a bigger test of the downside.

As Lena Komileva at G+Economics notes: “The severity of market moves has exposed how unprepared and unhedged markets are
to a return to a more normal rates and liquidity environment.”

She also highlights that the UK market’s sharp reaction to the Bank of England’s hawkish message this week illustrates “how
acutely sensitive investor portfolios are to the end of the crisis-era policy stimulus”.
Michael Mackenzie

Exchange-traded products that allow investors to wager on the tranquility of Cboe’s Vix index, a measure of stock market
volatility, have helped drive Cboe’s profits in recent years. The exchange-traded notes relied on Vix futures,
which can only be traded at Cboe.

But analysts fear the slide in value of two big notes and funds this week will have a bigger impact. Goldman Sachs estimated
Vix futures contributed about 40 per cent of Cboe’s earnings growth between 2015 and 2017, excluding its
2016 deal for Bats Global Markets.

Kenneth Worthington, an analyst at JPMorgan, said the liquidation of the exchange-traded notes was “potentially the tip of
the iceberg” as trading activity in Vix futures fell away in coming months. If the market moves from its
preferred strategy of shorting volatility to one where hedging its risk was dominant, investors might look
to other futures contracts, such as CME’s E-mini, he said.
Philip Stafford

Should investors worry about debt in emerging markets? The past week’s global market sell-off, and the rise in US interest
rates that lies behind it, suggest they should at least keep a very close eye.

Our chart shows the total debts of 21 EM countries compiled by the Institute of International Finance, an industry association
and data gatherer. It includes debts owed by governments, households, companies and the financial sector,
in local and foreign currencies.

One of the selling points of EMs during the rally in their stocks and bonds over the past two years has been the improvement
in their macroeconomic fundamentals. Dangerous current account deficits have largely been dealt with, the
narrative goes, and the debt overhangs of the past have been reduced, thanks partly to a transition from
foreign currency debts, which leave borrowers exposed to foreign exchange movements beyond their control,
into local currency debts, which governments can do more about (such as inflating them away in times of difficulty).

Indeed, there is much less EM debt today than there was in the crisis years of the 1980s and 1990s. But since the global
financial crisis of 2008-09, EM debts have been on the rise again. In dollar terms, in the IIF’s 21 countries,
they quintupled from $12tn in March 2005 to $60tn in September last year. In relation to gross domestic product,
they rose from 146 per cent to 217 per cent.

Significantly, as the chart shows, the amount of debt owed in foreign currencies has also risen over the same period, both
in absolute terms and as a share of GDP.

The picture is far from even across EMs. But in aggregate — which is how many investors view them — emerging markets are
more indebted today than at any point since the 2008-09 crisis. As global financial conditions begin to tighten,
that is something to watch.
Jonathan Wheatley

Rising bond yields as central banks slowly retreat from the era of easy money has already been a challenge for dividend-paying
companies. So far this year, Wall Street dividend payers are lagging behind the broad market. We are also
seeing an interesting trend from the UK, where a number of companies have issued profit warnings and cut
their payouts.

Andrew Lapthorne at Société Générale notes that their monthly dividend risk screen of high dividend yield stocks with poor
quality balance sheets is dominated by the UK. Of the current 50 companies that comprise the list, 21 are
listed in the UK.

In broader terms, what makes this all the more interesting is whether the UK is the proverbial canary in the coal mine. Loading
up balance sheets with debt and keeping dividends flowing has not just been a UK story during the easy money
era for many companies around the world.

Longview Economics, for example, estimates that some 12 per cent of US companies are “zombies” — defined as having earnings
before interest and tax that do not cover their interest expense.

The big difference at the moment is that a weaker UK economy compared with the rest of the world is a catalyst for profit
warnings from indebted companies that herald a dividend cut.

As global bond yields rise, Mr Lapthorne says we are seeing a substantial move against low-quality credit. Any tempering
of global growth will weigh against companies with weak balance sheets that pay chunky dividends.
Michael Mackenzie

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events and trends in a changing world.

It is not true that humanity cannot learn from history. It can and, in the case of the lessons of the dark period between
1914 and 1945, the west did. But it seems to have forgotten those lessons. We are living, once again, in
an era of strident nationalism and xenophobia. The hopes of a brave new world of progress, harmony and democracy,
raised by the market opening of the 1980s and the collapse of Soviet communism between 1989 and 1991, have
turned into ashes.

What lies ahead for the US, creator and guarantor of the postwar liberal order, soon to be governed by a president who repudiates
permanent alliances, embraces protectionism and admires despots? What lies ahead for a battered EU, contemplating
the rise of “illiberal democracy” in the east, Brexit and the possibility of Marine Le Pen’s election to
the French presidency?

What lies ahead now that Vladimir Putin’s irredentist Russia exerts increasing influence on the world and China has announced
that Xi Jinping is not first among equals but a “core leader”?

The contemporary global economic and political system originated as a reaction against the disasters of the first half of
the 20th century. The latter, in turn, were caused by the unprecedented, but highly uneven, economic progress
of the 19th century.

The transformational forces unleashed by industrialisation stimulated class conflict, nationalism and imperialism. Between
1914 and 1918, industrialised warfare and the Bolshevik revolution ensued. The attempted restoration of the
pre-first world war liberal order in the 1920s ended with the Great Depression, the triumph of Adolf Hitler
and the Japanese militarism of the 1930s. This then created the conditions for the catastrophic slaughter
of the second world war, to be followed by the communist revolution in China.

In the aftermath of the second world war, the world was divided between two camps: liberal democracy and communism. The US,
the world’s dominant economic power, led the former and the Soviet Union the latter. With US encouragement,
the empires controlled by enfeebled European states disintegrated, creating a host of new countries in what
was called the “third world”.

Contemplating the ruins of European civilisation and the threat from communist totalitarianism, the US, the world’s most
prosperous economy and militarily powerful country, used not only its wealth but also its example of democratic
self-government, to create, inspire and underpin a transatlantic west. In so doing, its leaders consciously
learnt from the disastrous political and economic mistakes their predecessors made after its entry into the
first world war in 1917.

Domestically, the countries of this new west emerged from the second world war with a commitment to full employment and some
form of welfare state. Internationally, a new set of institutions — the International Monetary Fund, the
World Bank, the General Agreement on Tariffs and Trade (ancestor of today’s World Trade Organisation) and
the Organisation for European Economic Co-operation (the instrument of the Marshall Plan, later renamed the
Organisation for Economic Co-operation and Development) — oversaw the reconstruction of Europe and promoted
global economic development. Nato, the core of the western security system, was founded in 1949. The Treaty
of Rome, which established the European Economic Community, forefather of the EU, was signed in 1957.

This creative activity came partly in response to immediate pressures, notably the postwar European economic misery and the
threat from Stalin’s Soviet Union. But it also reflected a vision of a more co-operative world.

From euphoria to disappointment

Economically, the postwar era can be divided into two periods: the Keynesian period of European and Japanese economic catch-up
and the subsequent period of market-oriented globalisation, which began with Deng Xiaoping’s reforms in China
from 1978 and the elections in the UK and US of Margaret Thatcher and Ronald Reagan in 1979 and 1980 respectively.

This latter period was characterised by completion of the Uruguay Round of trade negotiations in 1994, establishment of the
WTO in 1995, China’s entry into the WTO in 2001 and the enlargement of the EU, to include former members
of the Warsaw Pact, in 2004.

The first economic period ended in the great inflation of the 1970s. The second period ended with the western financial crisis
of 2007-09. Between these two periods lay a time of economic turmoil and uncertainty, as is true again now.
The main economic threat in the first period of transition was inflation. This time, it has been disinflation.

Geopolitically, the postwar era can also be divided into two periods: the cold war, which ended with the Soviet Union’s fall
in 1991, and the post-cold war era. The US fought significant wars in both periods: the Korean (1950-53)
and Vietnam (1963-1975) wars during the first, and the two Gulf wars (1990-91 and 2003) during the second.
But no war was fought among economically advanced great powers, though that came very close during the Cuban
missile crisis of 1962.

The first geopolitical period of the postwar era ended in disappointment for the Soviets and euphoria in the west. Today,
it is the west that confronts geopolitical and economic disappointment.

The Middle East is in turmoil. Mass migration has become a threat to European stability. Mr Putin’s Russia is on the march.
Mr Xi’s China is increasingly assertive. The west seems impotent.

These geopolitical shifts are, in part, the result of desirable changes, notably the spread of rapid economic development
beyond the west, particularly to the Asian giants, China and India. Some are also the result of choices made
elsewhere, not least Russia’s decision to reject liberal democracy in favour of nationalism and autocracy
as the core of its post-communist identity and China’s to combine a market economy with communist control.

Rising anger

Yet the west also made big mistakes, notably the decision in the aftermath of 9/11 to overthrow Iraqi leader Saddam Hussein
and spread democracy in the Middle East at gunpoint. In both the US and UK, the Iraq war is now seen as having
illegitimate origins, incompetent management and disastrous outcomes.

Western economies have also been affected, to varying degrees, by slowing growth, rising inequality, high unemployment (especially
in southern Europe), falling labour force participation and deindustrialisation. These shifts have had particularly
adverse effects on relatively unskilled men. Anger over mass immigration has grown, particularly in parts
of the population also adversely affected by other changes.

Some of these shifts were the result of economic changes that were either inevitable or the downside of desirable developments.
The threat to unskilled workers posed by technology could not be plausibly halted, nor could the rising competitiveness
of emerging economies. Yet, in economic policy, too, big mistakes were made, notably the failure to ensure
the gains from economic growth were more widely shared. The financial crisis of 2007-09 and subsequent eurozone
crisis were, however, the decisive events.

These had devastating economic effects: a sudden jump in unemployment followed by relatively weak recoveries. The economies
of the advanced countries are roughly a sixth smaller today than they would have been if pre-crisis trends
had continued.

The response to the crisis also undermined belief in the system’s fairness. While ordinary people lost their jobs or their
houses, the government bailed out the financial system. In the US, where the free market is a secular faith,
this looked particularly immoral.

Finally, these crises destroyed confidence in the competence and probity of financial, economic and policymaking elites,
notably over the management of the financial system and the wisdom of creating the euro.

All this together destroyed the bargain on which complex democracies rest, which held that elites could earn vast sums of
money or enjoy great influence and power as long as they delivered the goods. Instead, a long period of poor
income growth for most of the population, especially in the US, culminated, to almost everyone’s surprise,
in the biggest financial and economic crisis since the 1930s. Now, the shock has given way to fear and rage.

The succession of geopolitical and economic blunders has also undermined western states’ reputation for competence, while
raising that of Russia and, still more, China. It has also, with the election of Donald Trump, torn a hole
in the threadbare claims of US moral leadership.

We are, in short, at the end of both an economic period — that of western-led globalisation — and a geopolitical one — the
post-cold war “unipolar moment” of a US-led global order.

The question is whether what follows will be an unravelling of the post-second world war era into deglobalisation and conflict,
as happened in the first half of the 20th century, or a new period in which non-western powers, especially
China and India, play a bigger role in sustaining a co-operative global order.

Free trade and prosperity

A big part of the answer will be provided by western countries. Even now, after a generation of relative economic decline,
the US, the EU and Japan produce just over half of world output measured at market prices and 36 per cent
of it measured at purchasing power parity.

They also remain homes to the world’s most important and innovative companies, dominant financial markets, leading institutions
of higher education and most influential cultures. The US should also remain the world’s most powerful country,
particularly militarily, for decades. But its ability to influence the world is greatly enhanced by its network
of alliances, the product of the creative US statecraft during the early postwar era. Yet alliances also
need to be maintained.

The essential ingredient in western success must, however, be domestic. Slow growth and ageing populations have put pressure
on public spending. With weak growth, particularly of productivity, and structural upheaval in labour markets,
politics has taken on zero-sum characteristics: instead of being able to promise more for everybody, it becomes
more about taking from some to give to others. The winners in this struggle have been those who are already
highly successful. That makes those in the middle and bottom of the income distribution more anxious and
so more susceptible to racist and xenophobic demagoguery.

In assessing responses, two factors must be remembered.

First, the post-second world war era of US hegemony has been a huge overall success. Global average real incomes per head
rose by 460 per cent between 1950 and 2015. The proportion of the world’s population in extreme poverty has
fallen from 72 per cent in 1950 to 10 per cent in 2015.

Globally, life expectancy at birth has risen from 48 years in 1950 to 71 in 2015. The proportion of the world’s people living
in democracies has risen from 31 per cent in 1950 to 56 per cent in 2015.

Second, trade has been far from the leading cause of the long-term decline in the proportion of US jobs in manufacturing,
though the rise in the trade deficit had a significant effect on employment in manufacturing after 2000.
Technologically driven productivity growth has been far more powerful.

Similarly, trade has also not been the main cause of rising inequality: after all, high-income economies have all been buffeted
by the big shifts in international competitiveness, but the consequences of those shifts for the distribution
of income have varied hugely.

US and western leaders have to find better ways to satisfy their people’s demands. It looks, however, as though the UK still
lacks a clear idea of how it is going to function after Brexit, the eurozone remains fragile, and some of
the people Mr Trump plans to appoint, as well as Republicans in Congress, seem determined to slash the frayed
cords of the US social safety net.

A divided, inward-looking and mismanaged west is likely to become highly destabilising. China might then find greatness thrust
upon it. Whether it will be able to rise to a new global role, given its huge domestic challenges, is an
open question. It seems quite unlikely.

By succumbing to the lure of false solutions, born of disillusion and rage, the west might even destroy the intellectual
and institutional pillars on which the postwar global economic and political order has rested. It is easy
to understand those emotions, while rejecting such simplistic responses. The west will not heal itself by
ignoring the lessons of its history. But it could well create havoc in the attempt.

For the most ardent supporters of Brexit, the election of Donald Trump was a mixture of vindication and salvation. The president
of the US, no less, thinks it is a great idea for Britain to leave the EU. Even better, he seems to offer
an exciting escape route. The UK can leap off the rotting raft of the EU and on to the gleaming battleship
HMS Anglosphere.

It is an alluring vision. Unfortunately, it is precisely wrong. The election of Mr Trump has transformed Brexit from a risky
decision into a straightforward disaster. For the past 40 years, Britain has had two central pillars to its
foreign policy: membership of the EU and a “special relationship” with the US.

The decision to exit the EU leaves Britain much more dependent on the US, just at a time when America has elected an unstable
president opposed to most of the central propositions on which UK foreign policy is based.

During the brief trip to Washington by Theresa May, the UK prime minister, this unpleasant truth was partly obscured by trivia
and trade. Mr Trump’s decision to return the bust of Winston Churchill to the Oval Office was greeted with
slavish delight by Brexiters. More substantively, the Trump administration made it clear that it is minded
to do a trade deal with the UK just as soon as Britain’s EU divorce comes through.

But no sooner had Mrs May left Washington than Mr Trump caused uproar with his “Muslim ban”, affecting immigrants and refugees
from seven countries. After equivocating briefly, the prime minister was forced to distance herself from
her new best friend in the White House.

The refugee row underlined the extent to which Mrs May and Mr Trump have clashing visions of the world. Even when it comes
to trade, the supposed basis for their new special relationship, the two leaders have very different views.

Mrs May says that she wants the UK to be the champion of global free trade. But Mr Trump is the most protectionist US president
since the 1930s. This is a stark clash of visions that will be much harder to gloss over — if and when Mr
Trump begins slapping tariffs on foreign goods and ignoring the World Trade Organisation.

In addition, any trade deal with the Trump administration is likely to be hard to swallow for Britain and would involve controversial
concessions on the National Health Service and agriculture.

The British and American leaders also have profoundly different attitudes to international organisations. Mrs May is a firm
believer in the importance of Nato and the United Nations. (Britain’s permanent membership of the UN Security
Council is one of its few remaining totems of great power status). But Mr Trump has twice called Nato obsolete
and is threatening to slash US funding of the UN.

The May and Trump administrations are also at odds on the crucial questions of the future of the EU and of Russia. Mr Trump
is openly contemptuous of the EU and his aides have speculated that it might break up. This reflects the
views of Nigel Farage and the UK Independence party — but not of the current British government.

Mrs May knows that her difficult negotiations with the EU will become all-but-impossible if member states believe that the
UK is actively working to destroy their organisation in alliance with Mr Trump.

Her official position is that Britain wants to work with a strong EU. She probably even means it, given the economic and
political dangers that would flow from its break-up.

Not the least of these dangers would be an increased threat from a resurgent Russia. The British government worked closely
with the Obama administration to impose economic sanctions on the country after its annexation of Crimea.
But Mr Trump is already flirting with lifting sanctions.

The reality is that the UK is now faced with a US president who is fundamentally at odds with the British view of the world.
For all the forced smiles in the Oval Office last week, the May government certainly knows this. For political
reasons, Boris Johnson, the British foreign minister, is having to talk up the prospects of a trade deal
with Mr Trump.

Yet only a few months ago, Mr Johnson was saying that Mr Trump was “clearly out of his mind” and betrayed a “stupefying ignorance”
of the world.

Were it not for Brexit — a cause that Mr Johnson enthusiastically championed — the UK government would be able to take an
appropriately wary approach to Mr Trump. If Britain had voted to stay inside the EU, the obvious response
to the arrival of a pro-Russia protectionist in the Oval Office would be to draw closer to its European allies.

Britain could defend free-trade far more effectively with the EU’s bulk behind it — and could also start to explore the possibilities
for more EU defence co-operation. As it is, Britain has been thrown into the arms of an American president
that the UK’s foreign secretary has called a madman.

In the declining years of the British empire, some of its politicians flattered themselves that they could be “Greeks to
their Romans” — providing wise and experienced counsel to the new American imperium.

But the Emperor Nero has now taken power in Washington — and the British are having to smile and clap as he sets fires and
reaches for his fiddle.

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